nep-mac New Economics Papers
on Macroeconomics
Issue of 2013‒06‒16
fifty-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. A Bright Future Can Be Ours! Macroeconomic Policy for Non-Euro-Zone Western Countries. By John Nevile; Peter Kriesler
  2. Monetary policy, the tax code, and the real effects of energy shocks By William T. Gavin; Benjamin D. Keen; Finn E. Kydland
  3. Monetary Policy and Debt Deflation: Some Computational Experiments By Carl Chiarella; Corrado Di Guilmi
  4. Business Cycle Effects of Credit Shocks in a DSGE Model with Firm Defaults By M. Hashem Pesaran; TengTeng Xu
  5. Inflation gifts and endogenous growth through learning-by-doing By Andrea Vaona
  6. Monetary Policy Response to Foreign Aid in an Estimated DSGE Model of Malawi By Chance Mwabutwa, Manoel Bittencourt and Nicola Viegi
  7. Financial Globalization and Monetary Transmission By Meier, Simone
  8. Inflation Persistence or the Protracted Effects of Commodity Price Changes? By Wolfgang Pollan
  9. The Global Decline of the Labor Share By Loukas Karabarbounis; Brent Neiman
  10. Corporate Liquidity and Financial Fragility: The Role of Investment, Debt and Interest By Jan Toporowski
  11. The Bank of England's forecasting platform: COMPASS, MAPS, EASE and the suite of models By Burgess, Stephen; Fernandez-Corugedo, Emilio; Groth, Charlotta; Harrison, Richard; Monti, Francesca; Theodoridis, Konstantinos; Waldron, Matt
  12. The Interdependence between Credit and Real Business Cycles in Latin American Economies By José Eduardo Gómez; Jair Ojeda Joya; Fernando Tenjo Galarza; Héctor Manuel Zárate Solano
  13. Ready for euro? Empirical study of the actual monetary policy independence in Poland By Łukasz Goczek; Dagmara Mycielska
  14. On the Welfare Cost of Inflation: The Case of Pakistan By Mushtaq, Siffat; Rashid , Abdul; Qayyum , Abdul
  15. Deposit Insurance and Orderly Liquidation without Commitment: Can we Sleep Well? By Russell Cooper; Hubert Kempf
  16. Okun's Law across the Business Cycle and during the Great Recession: A Markov Switching Analysis By Rui M. Pereira
  17. Money Growth and Inflation: evidence from a Markov Switching Bayesian VAR By Gianni Amisano; Roberta Colavecchio
  18. Fiscal Sustainability of the European Welfare State: Evidence from Cumulative Excess of the Primary Balance By Stoian, Andreea
  19. Low interest rate policy and the use of reserve requirements in emerging markets By Hoffmann, Andreas; Loeffler, Axel
  20. Learning Leverage Shocks and the Great Recession By Patrick A. Pintus; Jacek Suda
  21. Normative Fiscal Policy and Growth: Some Quantitative Implications for the Chilean Economy By Emilio Espino; Martin Gonzalez Rozada
  22. Policies for structural transformation: An analysis of the Asia-Pacific experience By C.P. Chandrasekhar; Jayati Ghosh
  23. The Cyclical Behavior of the Price-Cost Markup By Christopher J. Nekarda; Valerie A. Ramey
  24. Quarterly Fiscal Policy Experiments with a Multiplier-Accelerator Model By David Kendrick; George Shoukry
  25. Impact of Macroeconomic and Endogenous Factors on Non-Performing Bank Assets By Swamy, Vighneswara
  26. Banking System Resilience and Financial Stability By Swany, Vighneswara
  27. Please do not shoot the wrong enemy! By Spanò , Marcello
  28. Nonlinear relationship between permanent and transitory components of monetary aggregates and the economy By Richard G. Anderson; Barry Jones; Marcelle Chauvet
  29. Allocation and industry productivity: Accounting for firm turnover By Maliranta, Mika; Määttänen, Niku
  30. The European Crisis in the Context of the History of Previous Financial Crises By Michael D. Bordo; Harold James
  31. Impact of national financial regulation on macroeconomic and fiscal performance after the 2007 financial stock: Econometric analyses based on cross-country data By Hagen, Tobias
  32. Fusing Indissolubly the Cycle and the Trend: Richard Goodwin’s Profound Insight. By Geoff Harcourt
  33. A new governance for EMU and the economic policy framework By Schilirò, Daniele
  34. Blessing or curse: The stabilizing role of remittances, foreign aid and FDI to Pakistan By Ahmed, Junaid; Martinez-Zarzoso, Inmaculada
  35. Determinants of Bank Asset Quality and Profitability - An Empirical Assessment By Swamy, Vighneswara
  36. On the International Spillovers of US Quantitative Easing By Marcel Fratzscher; Marco Lo Duca; Roland Straub
  37. GDP mimicking portfolios and the cross-section of stock returns By Kroencke, Tim A.; Schindler, Felix; Sebastian, Steffen; Theissen, Erik
  38. Non-core Liabilities and Credit Growth By Zubeyir Kilinc; Hatice Gokce Karasoy; Eray Yucel
  39. Optimalité en zone euro et réactivité migratoire en période de crise : un cas limite, l'Irlande. By Landais, Anne-Yvonne; Landais, Bernard
  40. Differential Fertility, Human Capital, and Development By Tom Vogl
  41. Financing human capital development via government debt: a small country case using overlapping generations framework By Stauvermann, Peter Josef; Kumar , Ronald
  42. Sovereign bond market reactions to fiscal rules and no-bailout clauses: The Swiss experience By Feld, Lars P.; Kalb, Alexander; Moessinger, Marc-Daniel; Osterloh, Steffen
  43. Cliométrie du modèle WS-PS en France By Michel-Pierre Chelini; Georges Prat
  44. Brand Capital and Firm Value By Belo, Frederico; Lin, Xiaoji; Vitorino, Maria Ana
  45. Why High Leverage Is Optimal for Banks By DeAngelo, Harry; Stulz, Rene M.
  46. Financial Regulation and Nation State Crisis Management: Evidence from Germany, Ireland and the UK By William Forbes; Sheila Frances O'Donohoe; Jörg Prokop
  47. Europe’s austerity budget for 2014-2020 and its rejection by the European Parliament. A short comment over an anti-Keynesian budget By Paolo Pini
  48. What Lessons Can Asia Draw from Capital Controls in Brazil during 2008–2012? By Jinjarak, Yothin; Noy, Ilan; Zheng, Huanhuan
  49. Fair Value Accounting in Banking – Issues in Convergence to IFRS By Swamy, Vighneswara; S, Vijayalakshmi
  50. Long-Run Price Elasticities of Demand for Credit: Evidence from a Countrywide Field Experiment in Mexico By Dean Karlan; Jonathan Zinman
  51. The Effectiveness of R&D Tax Credits: Cross-Industry Evidence By Russell Thomson
  52. دور المشروعات الصغیرة والمتوسطة فى التنمیة الصناعیة لمصر By Elasrag, Hussein

  1. By: John Nevile (School of Economics, University of New South Wales); Peter Kriesler (School of Economics, University of New South Wales)
    Abstract: Radical changes in macroeconomic policy could produce a brighter future. The neoclassical myth that a free-market economy inevitably moves to an equilibrium position determined solely by supply-side factors must be rejected and replaced by the insight that the position of an economy in the longer-run is path-dependent. Fiscal policy in recessions should be biased towards increasing physical and human capital which will improve the productivity of an economy, raising living standards and hence taxable capacity, thus enabling future public debt to be reduced if this is desirable. Monetary policy should play a very minor role in aggregate demand policy, with interest rate settings largely used to help achieve long-term income distribution goals. All this is fundamental to Geoff Harcourt’s vision of macroeconomic policy and this paper spells out how this vision can be implemented in 2012 in Western countries not hamstrung by Euro-zone rules and regulations.
    Keywords: macroeconomic policy, cyclical fluctuations, money and interest, monetary policy, fiscal policy.
    JEL: E00 E52 E62
    Date: 2012–04
  2. By: William T. Gavin; Benjamin D. Keen; Finn E. Kydland
    Abstract: This paper develops a monetary model with taxes to account for the apparently asymmetric and time-varying effects of energy shocks on output and hours worked in post-World War II U.S. data. In our model, the real effects of an energy shock are amplified when the monetary authority responds to that shock by changing its inflation objective. Specifically, higher inflation raises households’ nominal capital gains taxes since those taxes are not indexed to inflation. The increase in taxes behaves as a negative wealth effect and generates an immediate decline in output, investment, and hours worked. The large drop in investment then causes a gradual but very persistent decline in the capital stock. That protracted decline in the capital stock is associated with an extended period of low productivity growth and high inflation. Those real effects from the increase in nominal capital gains taxes are magnified by the tax on nominal interest income, which is also not indexed to inflation. A prolonged period of higher inflation and lower productivity growth following a negative energy shock is consistent with the stagflation of the 1970s. The negative effects, however, subsided greatly after 1980 because the Volcker disinflation policy prevented the Fed from accommodating negative energy shocks with higher inflation.
    Keywords: Business cycles ; Fiscal policy
    Date: 2013
  3. By: Carl Chiarella (Finance Discipline Group, UTS Business School, University of Technology, Sydney); Corrado Di Guilmi (Economics Discipline Group, UTS Business School, University of Technology, Sydney)
    Abstract: The paper presents an agent based model to study the possible effects of different fiscal and monetary policies in the context of debt deflation. We introduce a modified Taylor rule which includes the financial position of firms as a target. Monte Carlo simulations show that an excessive sensitivity of the central bank to inflation, the output gap and firms? debt can have undesired and destabilising effects on the system, while an active fiscal policy appears to be able to effectively stabilise the economy. The paper also addresses the puzzle of low inflation during stock market booms by testing different behavioural rules for the central bank. We find that, in a context of sticky prices and volatile expectations, endogenous credit can be identified as the main source of the divergent dynamics of prices in the real and financial sector.
    Keywords: Financial fragility; monetary policy; debt deflation; agent based modelling; complex dynamics
    JEL: E12 E31 E44
    Date: 2013–06–01
  4. By: M. Hashem Pesaran; TengTeng Xu
    Abstract: This paper proposes a theoretical framework to analyze the relationship between credit shocks, firm defaults and volatility, and to study the impact of credit shocks on business cycle dynamics. Firms are identical ex ante but differ ex post due to different realizations of firm-specific technology shocks, possibly leading to default by some firms. The paper advances a new modelling approach for the analysis of firm defaults and financial intermediation that takes account of the financial implications of such defaults for both households and banks. Results from a calibrated version of the model suggest that, in the steady state, a firm’s default probability rises with its leverage ratio and the level of uncertainty in the economy. A positive credit shock, defined as a rise in the loan-to-deposit ratio, increases output, consumption, hours and productivity, and reduces the spread between loan and deposit rates. The effects of the credit shock tend to be highly persistent, even without price rigidities and habit persistence in consumption behavior.
    Keywords: Business fluctuations and cycles; Credit and credit aggregates; Economic models; Financial Institutions
    JEL: E32 E44 G21
    Date: 2013
  5. By: Andrea Vaona (Department of Economics (University of Verona))
    Abstract: We investigate the link between inflation, growth and unemployment nesting a model of fair wages into one of endogenous growth of learning by doing and assuming that firms protect wages' purchasing power against inflation in exchange of worker's effort. Unemployment decreases with higher inflation and real growth rates. These effects tends to vanish as inflation and growth increase. Depending on the assumptions on learning-by-doing mechanisms, the effect of inflation on growth can be either nil or positive, but tiny. The Appendix shows that the short run effects of a monetary shocks mirror the long-run effects of inflation.
    Keywords: efficiency wages, money growth, long-run Phillips curve, trend inflation
    JEL: E3 E2 E4 E5
    Date: 2013–05
  6. By: Chance Mwabutwa, Manoel Bittencourt and Nicola Viegi
    Abstract: This paper estimates a Bayesian Dynamic Stochastic General Equilibrium (DSGE) model of Malawi and uses it to account for short-run monetary policy response to aid inflows between 1980 and 2010. In particular, the paper evaluates the existence of a “Dutch Disease†following an increase in foreign aid and examines the Reserve Bank of Malawi (RBM) reaction to aid inflows under different monetary policy rules. The paper finds strong evidence of “Taylor rule†like response of monetary policy to aid inflows. It also shows that a ‘Dutch Disease’ did not exist in Malawi because aid inflows were found to be associated with currency depreciation and not the expected real currency appreciation. There is also evidence of a low impact of a positive aid shock on currency depreciation and inflation when RBM engages in targeting monetary aggregates than when the authorities use the Taylor rule and incomplete sterilisation.
    Keywords: Taylor rule, DSGE model, Rule-of-Thumb, Spending, Absorption, Foreign exchange Rate
    JEL: C11 C13 E52 E62 F31 F35
    Date: 2013
  7. By: Meier, Simone
    Abstract: This paper analyzes the way in which international financial integration affects the transmission of monetary policy in a New Keynesian open economy framework. It extends Woodford’ (2010) analysis to a model with a richer financial markets structure, allowing for international trading in multiple assets and subject to financial intermediation costs. Two different forms of financial integration are considered, in particular an increase in the level of gross foreign asset holdings and a decrease in the costs of international asset trading. The simulations in the calibrated model show that none of the analyzed forms of financial integration undermine the effectiveness of monetary policy in influencing domestic output and inflation. Under realistic parameterizations, monetary policy is more, rather than less, effective as the positive impact of strengthened exchange rate and wealth channels more than offsets the negative impact of weakened interest rate channels. The paper also analyzes the interaction of financial integration with trade integration, varying both the importance of trade linkages and the degree of exchange rate pass-through. These interactions show that the positive effects of financial integration are amplified by trade integration. Overall, monetary policy is most effective in parameterizations with the highest degree of both financial and real integration.
    Keywords: monetary policy transmission; international financial integration
    JEL: E52 F41 F42 F47
    Date: 2013–06
  8. By: Wolfgang Pollan (WIFO)
    Abstract: This paper explores the question to what extent non-domestic factors provide an explanation of US inflation over the last three decades. Are lagged dependent variables – traditionally interpreted as proxies for inflation expectations – just proxies for oil and commodity prices? To answer this question a simple Phillips curve, which includes energy prices, is estimated for the USA. The results show that crude oil prices, which basically are world market prices, have exerted a strong influence on inflation, while the effects of domestic factors, such as the unemployment rate, have become weaker. These findings help to resolve a puzzle of recent years: given the sharp rise in unemployment, why has inflation not slowed down as much as predicted by the traditional Phillips curve analysis? Furthermore, the empirical results assign a much feebler role to expectations in the inflation process; if indeed inflation is a global phenomenon, the task of controlling inflation expectations by monetary policy may not be as crucial as implied by central banks statements pointing to the importance of anchoring inflation expectations. Are the actions of central banks nothing more than a sideshow?
    Keywords: Commodity prices, expectations, inflation, monetary policy, Phillips Curve
    Date: 2013–06–03
  9. By: Loukas Karabarbounis; Brent Neiman
    Abstract: The stability of the labor share of income is a key foundation in macroeconomic models. We document, however, that the global labor share has significantly declined since the early 1980s, with the decline occurring within the large majority of countries and industries. We show that the decrease in the relative price of investment goods, often attributed to advances in information technology and the computer age, induced firms to shift away from labor and toward capital. The lower price of investment goods explains roughly half of the observed decline in the labor share, even when we allow for other mechanisms influencing factor shares such as increasing profits, capital-augmenting technology growth, and the changing skill composition of the labor force. We highlight the implications of this explanation for welfare and macroeconomic dynamics.
    JEL: E21 E22 E25
    Date: 2013–06
  10. By: Jan Toporowski (Department of Economics, SOAS, University of London, UK)
    Abstract: The paper addresses the issue of how debt deflation may arise in a capitalist economy with a sophisticated credit system. It argues that the standard argument of debt deflationists, that debt-financed investment causes a build-up of unsustainable investment, fails to recognise that debt is back by credit. A corollary of this is that the rate of interest is not a factor in investment decisions. Financial fragility is caused by heterogeneity of balance sheets, debt financed operations in financial markets and insufficient debt-financed investment, rather than too much such investment.
    Keywords: Debt, Interest, Investment, Crisis
    JEL: E32 E51 G01 G30
    Date: 2012–03
  11. By: Burgess, Stephen (Bank of England); Fernandez-Corugedo, Emilio (International Monetary Fund); Groth, Charlotta (Zurich Insurance Group); Harrison, Richard (Bank of England); Monti, Francesca (Bank of England); Theodoridis, Konstantinos (Bank of England); Waldron, Matt (Bank of England)
    Abstract: This paper introduces the Bank of England's new forecasting platform and provides examples of how it can be applied to practical forecasting problems. The platform consists of four components: COMPASS, a structural central organising model; a suite of models, used to fill in the gaps in the economics of COMPASS and provide cross-checks on the forecast; MAPS, a macroeconomic modelling and projection toolkit; and EASE, a user interface. The platform has been in use since the end of 2011 in support of production of the projections produced for the Monetary Policy Committee’s quarterly Inflation Reports. In this paper we provide a full description of COMPASS, including discussion of its estimation and its properties. We also illustrate how the suite of models can be used to mitigate some of the trade-offs inherent in building a projection with a central organising model such as COMPASS, and discuss the role of the suite in addressing problems of model misspecification.
    Keywords: Forecasting; macro-modelling; misspecification
    JEL: E17 E20 E30 E40 E50
    Date: 2013–05–17
  12. By: José Eduardo Gómez; Jair Ojeda Joya; Fernando Tenjo Galarza; Héctor Manuel Zárate Solano
    Abstract: In this document we estimate credit and GDP cycles for three Latin-American economies and study their relation in the time and frequency domains. Cycles are estimated in order to analyze their medium and short-term frequencies. We find that short-term cycles are usually more volatile than medium-term cycles for credit and GDP in Chile, Colombia and Peru. We also find that credit-cycle peaks in the middle 1990s and middle 2000s precede notable GDP recessions 2 or 3 years later in these countries. Additionally, credit cycles in Latin-American economies tend to cause later movements in economic activity. This effect can be decomposed into two components: first, a negative effect in the case of business-cycle frequencies, and a positive effect in the case of medium-term GDP fluctuations.
    Date: 2013–06–03
  13. By: Łukasz Goczek (Faculty of Economic Sciences); Dagmara Mycielska (Faculty of Economic Sciences)
    Abstract: The aim of the article is to examine the actual degree of Polish monetary policy independence in the context of joining the Eurozone. It is frequently argued that the main cost of the participation in the EMU, or in any other common currency area, is the loss of monetary policy independence. In contrast, the paper raises the question of the actual possibility of such a policy in a small open economy operating within highly liberalized capital flows and highly integrated financial markets like Poland. Confirmation of the hypothesis concerning incomplete actual monetary independence is essential to the analysis of costs of the Polish accession to the EMU. The main hypothesis of the article is verified using a Vector Error-Correction Mechanism model and several parametric hypotheses concerning the speed and asymmetry of adjustment.
    Keywords: empirical analysis, Eurozone, monetary policy independence, monetary union
    JEL: E43 E52 E58 F41 F42 C32
    Date: 2013
  14. By: Mushtaq, Siffat; Rashid , Abdul; Qayyum , Abdul
    Abstract: In this study we quantified the welfare cost of inflation from the estimated long-run money demand functions for Pakistan for the period 1960-2007 using cointegration approach. The empirical results show that all the monetary aggregates are negatively related to the interest rate. The welfare gain of moving from positive inflation to zero inflation is approximately same under both money demand specifications but the behavior of the two models is different towards low interest rates. Moving from zero inflation to zero nominal interest rate has substantial gain under log-log form compared to the semi-log function. Compensating variation approach for the semi-log model gives higher welfare loss figures compared to the Bailey’s approach due to the quadratic nature of nominal interest rate in the Lucas (2000) welfare measure. However, the two approaches yield approximately similar the welfare cost of inflation for the log-log specification.
    Keywords: Inflation, Welfare costs, Pakistan
    JEL: E3 E4 E41
    Date: 2013–01–15
  15. By: Russell Cooper; Hubert Kempf
    Abstract: This paper studies the provision of deposit insurance along with liquidation decisions without commitment in an economy with heterogenous households. The analysis considers both the control of the balance sheet of a failing bank and the ex post provision of deposit insurance. Redistribution plays a key role in these decisions. When households are identical, deposit insurance will be provided ex post to reap insurance gains. But deposit insurance will not be provided ex post if it requires a (socially) undesirable redistribution of consumption which outweighs insurance gains. Partial deposit insurance may though have value. Heterogeneity across households also impacts the optimal liquidation decision.
    JEL: E42 E58 G01 G18
    Date: 2013–06
  16. By: Rui M. Pereira (Department of Economics, The College of William and Mary)
    Abstract: The substantial increase in unemployment during the Great Recession, coupled with the possibility of a breakdown in Okun's law, gave rise to concerns of a structural increase in the natural rate of unemployment. We estimate asymmetries in Okun's law using quarterly data from 1948:01-2012:04 across the business cycle as defined by exogenous breaks for the period after the peak of the business cycle to the trough. We further allow for endogenous break points by estimating a markov switching model. The estimated asymmetries rely on adequate specification of the dynamics of the relationship. The non-linearities in Okun's law provide strong support for an understanding of deviations in Okun's law during the Great Recession as a natural by-product of a stronger relationship between GDP growth during contractions than recoveries, although this fails to explain the entirety of the weak labor market conditions during the tepid recovery in economic activity. This similarly contributes towards an understanding of the phenomena of jobless recoveries which are a product of weak economic growth in recent decades coupled with a weaker relationship between GDP growth and unemployment during expansions. In this respect, the Great Recession, despite the relatively larger contraction in economic activity, was no different from previous recessions.
    Keywords: Okun's law, the Great Recession, Business Cycle, Auto-regressive distributed lag, Markov Switching.
    JEL: C22 E32
    Date: 2013–06–01
  17. By: Gianni Amisano (DG Research, European Central Bank and University of Brescia, Italy); Roberta Colavecchio (Universitaet Hamburg (University of Hamburg))
    Abstract: We contribute to the empirical debate on the role of money in monetary policy by analysing the features of the relationship between money growth and inflation in a Bayesian Markov Switching framework for a set of four countries, the US, the UK, the Euro area and Japan, over an estimation period spanning from 1960 to 2012. We find that the relationship between money growth and inflation appears to be nonlinear, as our estimation results identify multiple inflation regimes displaying clear and diversified features; moreover, as part of the model's information set, money growth plays a determinant role in the allocation of regimes. We show that observing monetary developments does (slightly) improve the signal of entering a high inflation regime but the influence of money on such signal seems to be relevant mainly in the 70s and the early 80s, i.e. in periods featuring exceptionally high rates of inflation. Our evidence confi?rms that the relationship between money and inflation appears to be relatively weak during periods featuring low and stable inflation.
    Keywords: Money growth, infl?ation regimes, Markov Switching model, Bayesian inference
    JEL: C11 C53 E31
    Date: 2013–05
  18. By: Stoian, Andreea (Bucharest Academy of Economic Studies)
    Abstract: Tanzi and Schuknecht (1997) pointed out that one of the key features of welfare state is to run large fiscal deficits and public debt. This can be explained considering the rise of the social transfers that led to an overall increase of the total government spending. Growing public debt can generate fiscal sustainability issues in the long run. Therefore, the aim of this paper is to study fiscal sustainability using an indicator named the Cumulative Excess of the Primary Balance (CEPB) that avoids the shortcomings induced by non-stationary time series or Structural breaks when applying classical econometric tools. CEPB is derived from a simple Dynamic model of public debt that allows estimating the primary balance that stabilizes public debt. Applying CEPB for annual data extracted for 1980-2007 period for two distinct European welfare regimes, we find that the Nordic welfare states are less exposed to fiscal Sustainability issues in the long run than the Conservative countries.
    Keywords: Fiscal sustainability; budgetary deficit; primary balance; public debt; welfare state
    JEL: E62 H62 H63
    Date: 2012–06–12
  19. By: Hoffmann, Andreas; Loeffler, Axel
    Abstract: The paper attempts to shed light on the link between monetary policy in large economies with international currencies (the United States and the euro area) and the use of reserve requirements in emerging markets. Using reserve requirement data for 28 emerging markets from 1998 to 2012 we provide evidence that emerging markets tend to raise reserve requirements and repress financial markets to curb speculative capital inflows when interest rates in the major economies decline. Our finding suggests that the current low interest rate policies of the major economies may have collateral effects on emerging markets by triggering financially repressive policies. --
    Keywords: Reserve Requirements,Financial Repression,Emerging Markets
    JEL: E52 E58
    Date: 2013
  20. By: Patrick A. Pintus (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales [EHESS] - Ecole Centrale Marseille (ECM)); Jacek Suda (Banque de france - Banque de France)
    Abstract: This paper develops a simple business-cycle model in which financial shocks have large macroeconomic effects when private agents are gradually learning their economic environment. When agents update their beliefs about the unobserved process driving financial shocks to the leverage ratio, the responses of output and other aggregates under adaptive learning are significantly larger than under rational expectations. In our benchmark case calibrated using US data on leverage, debt-to-GDP and land value-to-GDP ratios for 1996Q1-2008Q4, learning amplifies leverage shocks by a factor of about three, relative to rational expectations. When fed with the actual leverage innovations, the learning model predicts the correct magnitude for the Great Recession, while its rational expectations counterpart predicts a counter-factual expansion. In addition, we show that procyclical leverage reinforces the impact of learning and, accordingly, that macro-prudential policies enforcing countercyclical leverage dampen the effects of leverage shocks. Finally, we illustrate how learning with a misspecified model that ignores real/financial linkages also contributes to magnify financial shocks.
    Keywords: borrowing constraints; collateral; leverage; learning; financial shocks; recession
    Date: 2013–06
  21. By: Emilio Espino; Martin Gonzalez Rozada
    Abstract: This paper explores the qualitative and quantitative implications of optimal tax- ation in a developing economy when economic growth is endogenously determined. We di¤erentiate this class of economies from a developed economy in two aspects: 1. the informal sector is quantitatively signi…cant and, 2. tax-collecting technologies are more rudimentary. We characterize competitive equilibrium allocations and Ramsey allocations in the context of a small open economy in which the interest rate is endoge- nously determined, some workers can be hired in the informal market and imperfect tax-collecting technology can be heterogeneous across types of taxes. We calibrate the parameters of our model to the Chilean economy. Overall, our results suggest that capital should still be taxed but considerably less than actual taxes (that is, 10.78% versus 18.5%). Labor should be subsidized (to stimulate accumulation of human capital) while consumption taxes should be increased by 50% approximately (from 19% to 28%). As expected, the better collecting technologies, the higher the corresponding taxes. In this context, the resulting growth rate increases only slightly along the balanced growth path.
    Keywords: Optimal fiscal policy, economic growth, inefficient tax collecting technology
    JEL: E61 E62 H21
    Date: 2013–06
  22. By: C.P. Chandrasekhar (Professor, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi 110 067 India); Jayati Ghosh (Professor, Jawaharlal Nehru University, 52 DP, JNU, New Delhi 110067 India.)
    Abstract: Remarkable growth and structural transformation in a number of developing Asian countries in the period after World War II have earned them the reputation for being “models” of successful development. Among the factors that contributed to their success were macroeconomic and regulatory policies that permitted them to finance that transformation without experiencing high inflation or balance of payments difficulties and ensure that growth was accompanied by human development advance. This article identifies a set of key policies that contributed to that success, examines the ways in which they did so, and assesses the degree to which they can inform policy in other Asian contexts in a period when much has changed in the national and international economic environment.
    Keywords: Structural transformation, macroeconomic policy, sources of growth, public investment, capital controls, financial policy, wage-goods constraint
    JEL: E2 E3 O11 O14 O19 O24 O25
  23. By: Christopher J. Nekarda; Valerie A. Ramey
    Abstract: A countercyclical markup of price over marginal cost is the key transmission mechanism for demand shocks in textbook New Keynesian (NK) models. This paper re-examines the foundation of those models. We study the cyclicality of markups in the private economy as well as in detailed manufacturing industries. First, we show that frameworks for measuring markups that have produced the strongest evidence for countercyclicality produce the opposite result when we substitute new methods and data. Second, because the NK model's predictions differ by the nature of the shock, we present evidence on the cyclicality of the markup conditional on various types of shocks. Consistent with the NK model, we find that markups are procyclical conditional on a technology shock. However, we find that they are either procyclical or acyclical conditional on demand shocks. Thus, the textbook NK explanation for the effects of government spending or monetary policy is not supported by the behavior of the markup.
    JEL: E32 L16
    Date: 2013–06
  24. By: David Kendrick (Department of Economics, The University of Texas at Austin); George Shoukry (Department of Economics, The University of Texas at Austin)
    Abstract: In an earlier paper, i.e. Kendrick and Amman (2010) we raised the question of whether adjusting fiscal policy more frequently than its current pace of once a year could be used to improve stabilization. Also, we proposed a method for shedding light on that question by using a small macroeconometric model in a quadratic linear tracking stochastic control framework with an implicit feedback rule to compare a scenario in which fiscal policy was changed quarterly to a scenario in which it was only changed once a year. In this paper we first report on the use of counterfactual experiments in the 2007 thru 2010 period of a major downturn in the economy. We find in one experiment that quarterly changes in policy stabilize output levels in the economy better than annual changes with a slightly larger increase in debt over the counterfactual period. In a second experiment we find that when weight changes are used to get roughly equal stabilization results, the increase in the debt level is substantially less with quarterly than with annual policy changes. In the second part of the paper we repeat the two experiments but do so in a Monte Carlo framework. The results in this more general framework also point the way to a finding that a relatively simple shift from annual to quarterly fiscal policy could provide either better stabilization results with a slightly larger increase in the debt level or similar stabilization results but with a smaller increase in the debt level.
    Keywords: fiscal policy, stochastic control, economic stochastic control models, feedback rules, macroeconomics, stabilization policy.
    JEL: E62 C63
    Date: 2013–02
  25. By: Swamy, Vighneswara
    Abstract: Determinants of default risk of banks in emerging economies have so far received inadequate attention in the literature. Using panel data techniques, this paper seeks to examine the impact of macroeconomic and endogenous factors on non-performing assets for the period from 1997-2009. The findings of the study reveal some interesting inferences contrary to the perception of few opinion makers. Lending Rates have been found to be not so significant in affecting the NPAs contrary to the general perception Bank Assets has turned out to be negatively significant indicating that large banks may have better risk management procedures and technology which definitely allows them to finish up with lower levels of NPAs. Further, this study has established that private banks and foreign banks have advantages in terms of their efficiencies in better credit management in containing the NPAs that indicates that bank privatization can lead to better management of default risk.
    Keywords: Banks, Risk Management, Ownership Structure, Financial Markets, Non-Performing Assets, Lending Policy, Macro-economy, Central Banks
    JEL: E44 E51 G21 G32
    Date: 2012
  26. By: Swany, Vighneswara
    Abstract: This paper while emphasising the importance of the concept of financial stability in the wake of recent global financial crisis attempts to highlight the significance of the soundness of banking sector in emerging economies where banking sector constitutes a lion’s share in the financial system. Attempt is made to define financial stability in backdrop of the ongoing definition debate for financial stability. Another contribution of this study is that, employing the appropriate key determinants of banking sector soundness, the paper models a basic axiomatic form of banking stability index (BSI) in the context of an emerging economy banking sector.
    Keywords: Financial stability; Instability; Banks and financial institutions, Indicator, Crisis
    JEL: E44 E58 G2 G21 G28
    Date: 2013–05
  27. By: Spanò , Marcello (University of Insubria)
    Abstract: This work analyses external imbalances across Europe using data on sectorial gross value of assets over sixteen years (1995-2011) in founder countries of the European Union and in the whole Euro area. The empirical analysis strongly supports arguments against the thesis that in Europe sovereign debt is the problem and fiscal austerity the solution. On the contrary, it suggests that the current crisis originates from the growing disproportion of the financial sector compared to real sectors of the economy. This study divides the financial assets generated by the domestic financial companies and by the foreign sector into two aggregates: financial resources channelled to the real domestic sectors and ‘financial assets overhang’ held within the financial and foreign sector. The financial assets overhang, which boosted the relative size of the financial sector across the continent, should be considered as the main source of excess finance to be rigidly constrained.
    Keywords: European union; euro area; sovereign debt; fiscal austerity
    JEL: E50 E60
    Date: 2013–05–27
  28. By: Richard G. Anderson; Barry Jones; Marcelle Chauvet
    Abstract: This paper uses several methods to study the interrelationship among Divisia monetary aggregates, prices, and income, allowing for nonstationary, nonlinearities, asymmetries, and time-varying relationships among the series. We propose a multivariate regime switching unobserved components model to obtain transitory and permanent components for each series, allowing for potential recurrent and structural changes in their dynamics. Each component follows distinct two-state Markov processes representing low or high phases. Since the lead-lag relationship between the phases can vary over time, rather than preimposing a structure to their linkages, the proposed flexible framework enables us to study their specific lead-lag relationship over each one of their cycles and over each U.S. recession in the last 40 years. The decomposition of the series into permanent and transitory components reveals striking results. First, we find a strong nonlinear association between the components of money and prices – all low phases of the transitory component of prices were preceded by tight transitory and permanent money phases. We also find that most recessions were preceded by tight money phases (its cyclical and permanent components) and high transitory price phases (with the exception of the 2001 and 2009-2010 recessions). In addition, all recessions were associated with a decrease in transitory and permanent income.>
    Keywords: Debt ; Inflation (Finance) ; Banks and banking, Central
    Date: 2013
  29. By: Maliranta, Mika; Määttänen, Niku
    Abstract: Recent macroeconomic literature has stressed the importance of resource allocation between firms for aggregate productivity. An important issue, therefore, is how to measure allocative efficiency. We compare popular indicators of allocative efficiency, paying special attention to firm turnover. We first show how entering and exiting firms contribute to aggregate productivity and to the Olley-Pakes (OP) covariance component, which is currently the most popular measure of allocative efficiency. Our data cover essentially all firms and plants in the Finnish business sector. We then build a model of firm dynamics with endogenous turnover that is consistent with the main patterns of our empirical results and use it to test how well alternative indicators capture different allocation distortions. Our results demonstrate how and why commonly used indicators fail to capture certain distortions because of endogenous changes in firm turnover.
    Keywords: productivity; firm dynamics; reallocation
    JEL: E23 L16 O47
    Date: 2013–05–27
  30. By: Michael D. Bordo; Harold James
    Abstract: There are some striking similarities between the pre 1914 gold standard and EMU today. Both arrangements are based on fixed exchange rates, monetary and fiscal orthodoxy. Each regime gave easy access by financially underdeveloped peripheral countries to capital from the core countries. But the gold standard was a contingent rule—in the case of an emergency like a major war or a serious financial crisis --a country could temporarily devalue its currency. The EMU has no such safety valve. Capital flows in both regimes fueled asset price booms via the banking system ending in major crises in the peripheral countries. But not having the escape clause has meant that present day Greece and other peripheral European countries have suffered much greater economic harm than did Argentina in the Baring Crisis of 1890.
    JEL: E00 N1
    Date: 2013–06
  31. By: Hagen, Tobias
    Abstract: Using cross-country data, this paper estimates the impact of the 2007 financial shock on countries' macroeconomic developments conditional on national financial regulations before the crisis. For this purpose, the financial reform index developed by Abiad et al. (2008) is used. The econometric analyses indicate that countries with more deregulated financial markets experienced deeper recessions, stronger employment losses, and larger government budget deficits. Against the background of the ongoing global crisis and the results of other studies, the usefulness of liberalized financial markets for macroeconomic stability and economic development should be rigorously reconsidered. --
    Keywords: Financial Crisis,Financial Regulation,Great Recession,Robust Regression,Semi-Parametric Regression
    JEL: E32 G18 C21
    Date: 2013
  32. By: Geoff Harcourt (School of Economics, University of New South Wales)
    Abstract: none.
    Keywords: none.
    JEL: E00
    Date: 2012–05
  33. By: Schilirò, Daniele
    Abstract: The severe crisis affecting European Monetary Union has emphasized the prevailing interests of national governments and the lack of political leadership of European institutions, not to mention the failure of eurozone governance in terms of effective crisis management. The present work argues that the decisions taken in March 2011 by the European Council, namely the ‘Pact for the Euro’, to design the new governance of European Monetary Union (EMU), can be considered a necessary though insufficient step for European institutions in terms of credibility and legitimacy. By assessing the economic policy framework set up by the Pact for the Euro, this contribution underlines the need for appropriate institutions, and a stronger attitude of cooperation among Member States. It also stresses the need for transparency and a non-ambiguous solution to the debt crisis. The major message of this work is that Economic and Monetary Union must equip itself with the appropriate policy tools to manage and resolve the crisis, creating the conditions to improve the competitiveness of the peripheral countries of the eurozone and fostering growth. At the same time, however, eurozone member states and European institutions must demonstrate greater accountability and political coherence.
    Keywords: EMU; Pact for the Euro; European integration; European institutions; economic policies
    JEL: E63 F1 F15 F3 F36 O52
    Date: 2012–04
  34. By: Ahmed, Junaid; Martinez-Zarzoso, Inmaculada
    Abstract: Inflows of remittances to Pakistan are being increasingly viewed as a relatively attractive source of external finance, one that can help to foster development and manage economic shocks. Remittances have become a major source of revenue, surpassing the volume of FDI and official development assistance that the country receives. This study focuses primarily on the stability, cyclicality and stabilization impacts of migrant remittances to Pakistan. It is evident that foreign inflows exhibit different types of volatility; remittances are found to be a less volatile source of external finance than FDI and ODA that are counter-cyclical and stabilizing, thus serving to steady the recipient economy in times of economic downturns. ODA appears to be acyclical and stabilizing, whereas FDI emerges as pro-cyclical and destabilizing. Furthermore, remittances are insensitive to cyclical fluctuation in source countries. We also proceed with SVAR-based identification in order to examine the responses of financial flows to innovation in receiving and source economies. We confirm the counter-cyclical mechanism of remittances with Pakistani output. In particular, our results indicate that remittance flows to Pakistan are mainly due to the economic conditions in the receiving economy. --
    Keywords: remittances,FDI,ODA,,business cycle,Pakistan
    JEL: E32 F15 F21 F22 F35
    Date: 2013
  35. By: Swamy, Vighneswara
    Abstract: Determinants of default risk of banks in emerging economies have so far received inadequate attention in the literature. Using panel data techniques, this paper seeks to study the determinants bank asset quality and profitability using robust data sets for the period from 1997-2009. The findings of the study reveal some interesting inferences contrary to the established perceptions. Priority sector credit has been found to be not significant in affecting the NPAs contrary to the general perception and similar is the case with that of rural branches implying that aversion to rural credit is a falsely founded perception. Bad Debts are dependent more on the performance of the industry than other sectors of the economy. Public sector banks have shown significant performance in containing bad debts private banks have continued to be stable in containing the bad debts as they have better risk management procedures and technology, which definitely allows them to finish up with lower levels of NPAs. Further, investigating the effect of determinants on profitability it is established that while capital adequacy and investment activity significantly affect the profitability of commercial banks apart from other accepted determinants of profitability, asset size has no significant impact on profitability.
    Keywords: Banks, Risk management, Ownership structure, Financial markets, Non-Performing Assets, Lending Policy, Macro-economy, Central Banks, Banking regulation, Financial system stability
    JEL: E44 E58 G21 G28 G32
    Date: 2013–01
  36. By: Marcel Fratzscher; Marco Lo Duca; Roland Straub
    Abstract: The paper analyses the global spillovers of the Federal Reserve's unconventional monetary policy measures. First, we find that Fed measures in the early phase of the crisis (QE1), but not since 2010 (QE2), were highly effective in lowering sovereign yields and raising equity markets in the US and globally across 65 countries. Yet Fed policies functioned in a procyclical manner for capital flows to emerging markets (EMEs) and a counter-cyclical way for the US, triggering a portfolio rebalancing across countries out of EMEs into US equity and bond funds under QE1, and in the opposite direction under QE2. Second, the impact of Fed operations, such as Treasury and MBS purchases, on portfolio allocations and asset prices dwarfed those of Fed announcements, underlining the importance of the market repair and liquidity functions of Fed policies. Third, we find no evidence that FX or capital account policies helped countries shield themselves from these US policy spillovers, but rather that responses to Fed policies are related to country risk. The results thus illustrate how US unconventional measures have contributed to portfolio reallocation as well as a re-pricing of risk in global financial markets.
    Keywords: Monetary policy, quantitative easing, portfolio choice, capital flows, Federal Reserve, United States, policy responses, emerging markets, panel data
    JEL: E52 E58 F32 F34 G11
    Date: 2013
  37. By: Kroencke, Tim A.; Schindler, Felix; Sebastian, Steffen; Theissen, Erik
    Abstract: The components of GDP (residential investment, durables, nondurables, equipment and software, and business structures) display a pronounced lead-lag structure. We investigate the implications of this lead-lag structure for the cross-section of asset returns. We find that the leading GDP components perform well in explaining the returns of 25 size and book-to-market portfolios and do reasonably well in explaining the returns of 10 momentum portfolios. The lagging components do a poor job at explaining the returns of 25 size and book-to-market portfolios but explain the return of momentum portfolios very well. A three-factor model with the market risk premium, one leading and one lagging GDP component compares very favorably with the Carhart four-factor model in jointly explaining the returns on 25 size/book-to-market portfolios, 10 momentum portfolios and 30 industry portfolios. --
    Keywords: Business Cycle,Lead,Lag,Size,Value,Momentum
    JEL: E32 G12
    Date: 2013
  38. By: Zubeyir Kilinc; Hatice Gokce Karasoy; Eray Yucel
    Abstract: The composition of bank liabilities has captured a lot of attention especially after the global financial crisis. It is argued that movements particularly in the non-core liabilities may reflect the stage of financial cycle. The literature claims that banks usually fund their credits with core liabilities, which grow with households’ wealth, but when there is a faster growth in credits compared to deposits, the banks resort to non-core liabilities to meet the excess demand. Despite this significant role assumed to be played by the non-core liabilities, there are not too many country-specific studies on this issue. This study analyzes the relationship between the non-core liabilities and credits within a small open economy, namely Turkey. It investigates the relationship under alternative settings and reveals a robust relationship between credits and non-core liabilities under all frameworks. The study also verifies that elevated demand for credit may induce some increase in the non-core liabilities. Finally, the relationship is affirmed in the long-run.
    Keywords: Core Liabilities, Non-core Liabilities, Credits, Small Open Economy, VAR, VECM
    JEL: E44 E51
    Date: 2013
  39. By: Landais, Anne-Yvonne; Landais, Bernard
    Abstract: This paper observes the Irish migrations during the Great Recession and analyses their relation with its adjustment. This scrutiny refers to enlarged OCA (Optimum Currency Area theory) when the Rest of World is considered. The Irish case is a good example of this new approach and particularly about the Mundellian criterium of labor mobility. But by its specific outside Europe globalisation and its strong migratory reactivity during the recent crisis, Ireland represents a borderline case.
    Keywords: Ireland, Migrations, Opimal Currency Areas, Great Recession, Adjustment Ireland, Migrations, Opimal Currency Areas, Great Recession, Adjustment Ireland, Migrations, Opimal Currency Areas, Great Recession, Adjustment Ireland ; Migrations ; Optimal Currency Areas ; "Great Recession" ; Adjustment.
    JEL: E32 J61
    Date: 2013–06–10
  40. By: Tom Vogl
    Abstract: Discussions of cross-sectional fertility heterogeneity and its interaction with economic growth typically assume that the poor have more children than the rich. Micro-data from 48 developing countries suggest that this assumption was false until recently. Over the second half of the twentieth century, the association of economic status with fertility and the association of the number of siblings with their education flipped from generally positive to generally negative. Because large families switched from investing in more education to investing in less, heterogeneity in fertility across families initially increased but now largely decreases average educational attainment. While changes in GDP per capita, women's work, sectoral composition, urbanization, and population health do not explain the reversal, roughly half of it can be attributed to the rising aggregate education levels of the parent generation. The results are consistent with two classes of theories of the fertility transition: (1) those based on changing preferences over the quality and quantity of children and (2) those incorporating subsistence consumption constraints.
    JEL: E24 I25 J1 O1
    Date: 2013–06
  41. By: Stauvermann, Peter Josef; Kumar , Ronald
    Abstract: Using an over-lapping generations (OLG) model, we show how small open economies can enhance their growth through educational subsidies financed via government debt. In our model, we endogenize human capital and fertility without the strong assumptions of altruism or positive spill over effects from human capital accumulation. We show that subsidizing education through government debt leads to a Pareto improvement of all generations. Even if a country is a net borrower in the international capital market, we show that this subsidy-policy can help, under certain conditions, to improve its net borrowing position. Especially, our analysis can be applied to less developed countries, which are locked in a low development trap. A further desirable outcome of our analysis is that fertility rates decline for the small and less developed countries.
    Keywords: fertility; human capital; education subsidy; government debt.
    JEL: E60 H63 O41
    Date: 2013–04
  42. By: Feld, Lars P.; Kalb, Alexander; Moessinger, Marc-Daniel; Osterloh, Steffen
    Abstract: We investigate the political determinants of risk premiums which sub-national governments in Switzerland have to pay for their sovereign bond emissions. For this purpose we analyse financial market data from 288 tradable cantonal bonds in the period from 1981 to 2007. Our main focus is on two different institutional factors. First, many of the Swiss cantons have adopted strong fiscal rules. We find evidence that both the presence and the strength of these fiscal rules contribute significantly to lower cantonal bond spreads. Second, we study the impact of a credible no-bailout regime on the risk premia of potential guarantors. We make use of the Leukerbad court decision in July 2003 which relieved the cantons from backing municipalities in financial distress, thus leading to a fully credible no-bailout regime. Our results show that this break lead to a reduction of cantonal risk premia by about 25 basis points. Moreover, it cut the link between cantonal risk premia and the financial situation of the municipalities in its canton which existed before. This demonstrates that a not fully credible no-bailout commitment can entail high costs for the potential guarantor. --
    Keywords: Sub-national government bonds,fiscal rules,no-bailout clause,sovereign risk premium
    JEL: E62 G12 H63 H74
    Date: 2013
  43. By: Michel-Pierre Chelini; Georges Prat
    Abstract: Le modèle Wage Setting – Price Setting (WS-PS, Layard - Nickel - Jackman (1991)) fondé sur les négociations salariés-employeurs fournit un cadre général théorique simple et opérationnel pour comprendre les évolutions macroéconomiques historiques du chômage et des salaires en France sur longue période. Dans ce cadre, nous montrons, d’une part, que le degré de rigidité du marché du travail est un phénomène devant être daté - une représentation espace-état semblant adaptée à cette nécessité (méthode du filtre de Kalman) – et, d’autre part, qu’il est nécessaire d’établir une distinction entre le prix de référence des salariés et celui fixé par les employeurs. En outre, moyennant des hypothèses additionnelles concernant la représentation de facteurs conjoncturels et structurels supposés mais non spécifiés dans WS-PS - nous montrons qu’il est possible de caractériser et de chiffrer par date les trois composantes du chômage d’équilibre : le chômage chronique (résultant d’un excès du coût réel du travail par rapport à la productivité), le chômage conjoncturel (résultant d’un niveau d’activité inférieur à la production potentielle), et le chômage structurel (résultant de facteurs volontaires, frictionnels et technologiques). Il apparaît qu’aucune de ces trois composantes ne peut être négligée par rapport aux deux autres. Le taux de salaire est quant à lui déterminé par une moyenne pondérée des équations WS et PS traduisant respectivement les exigences salariales des salariés et des employeurs, le coefficient de pondération de ces deux équations mesurant les forces de négociation respectives des deux parties. En moyenne sur l’ensemble de la période, les résultats suggèrent que les forces de négociation sont équilibrées entre les salariés et les employeurs. Le salaire nominal apparaît ainsi dépendre du niveau général des prix et de celui la productivité, du taux de marge des entreprises, et enfin du taux de chômage observé, l’influence de ce dernier pouvant changer de signe au cours du temps suivant l’importance relative que les salariés et les employeurs attribuent au sous-emploi au cours des négociations.
    Keywords: taux de chômage, salaires, économie française
    JEL: E24 J2 J30
    Date: 2013
  44. By: Belo, Frederico (University of MN); Lin, Xiaoji (OH State University); Vitorino, Maria Ana (University of MN)
    Abstract: We study the role of brand capital--a primary form of intangible capital--for firm valuation and risk in the cross section of publicly traded firms. Using a novel empirical measure of brand capital stock constructed from advertising expenditures accounting data, we show that: (i) firms with low brand capital investment rates have higher average stock returns than firms with high brand capital investment rates, a difference of 5.2% per annum; (ii) more brand capital intensive firms have higher average stock returns than less brand capital intensive firms, a difference of 5.1% per annum; and (iii) investment in both brand capital and physical capital is volatile and procyclical. A neoclassical investment-based model in which brand capital is a factor of production subject to adjustment costs matches the data well. The model also provides a novel explanation for the empirical links between advertising expenditures and stock returns around seasoned equity offerings (SEO) documented in previous studies.
    JEL: E32 G12
    Date: 2013–03
  45. By: DeAngelo, Harry (University of Southern CA); Stulz, Rene M. (OH State University and ECGI)
    Abstract: Liquidity production is a central role of banks. When there is a market premium for the production of (socially valuable) liquid financial claims and no other departures from the Modigliani and Miller (1958, MM) assumptions, we show that high leverage is optimal for banks. In this model, high leverage is not the result of distortions from agency problems, deposit insurance, or tax motives to borrow. The model can explain (i) why bank leverage increased over the last 150 years or so without invoking any of these distortions, (ii) why high bank leverage per se does not necessarily cause systemic risk, and (iii) why limits on the leverage of regulated banks impede their ability to compete with unregulated shadow banks. MM's leverage irrelevance theorem is inapplicable to banks: Because debt-equity neutrality assigns zero weight to the social value of liquidity, it is an inappropriately equity-biased baseline for assessing whether the high leverage ratios of real-world banks are excessive or socially destructive.
    JEL: E42 E51 G01 G21 G32 L51
    Date: 2013–05
  46. By: William Forbes (Loughborough University - Business School); Sheila Frances O'Donohoe (Waterford Institute of Technology); Jörg Prokop (University of Oldenburg - Finance and Banking & ZenTra)
    Abstract: We study the unfolding of the credit crisis until 2008, and the diversity of policy responses in Germany, Ireland, and the UK. We show that although the channels through which these three European states manifested financial distress were different, the crisis evoked similar reactions by regulators and national governments. Our conclusion emphasise the role of state regulatory bodies as a primary source of the “rules of the game” in financial markets, and they support several of the policy measures taken in the aftermath of the credit crisis. In particular, we argue that adverse regulatory incentives at a national level require strengthening regulation at the European level, to avoid national capture and a resulting race to the bottom by national financial regulators.
    Keywords: regulation, Europe, banking, financial crisis
    JEL: E44 G01 G18 H11 H12
    Date: 2013–05
  47. By: Paolo Pini
    Abstract: In April this year the European Parliament in Strasbourg said "no" to the multi-annual budget which Governments of the European Union member Countries had agreed upon in February 2013. The changes may be minimal, but a strong message was sent to governments by the only institution in Europe elected by its citizens. The budget proposal for 2014-2020 (the Multi-annual Financial Framework - MFF) was rejected due to both method and content. To method, because it is a deficit budget which leaves the European Commission with little margin of flexibility for anti-recession measures. To content, because it favours redistributive policies between European countries rather than policies encouraging growth and employment throughout the European Union. It is an austerity budget which is deeply anti-Keynesian in a period of serious economic crisis analogous to the great depression of the 1930s. A policy of growth at a European level is needed in order to cope with the economic depression, yet a policy of rigour and austerity was proposed. That is why it is good that it was rejected by the European Parliament.
    Keywords: European budget; economic crisis; economic policy
    JEL: E6 O52 P16
    Date: 2013–05–03
  48. By: Jinjarak, Yothin (Asian Development Bank Institute); Noy, Ilan (Asian Development Bank Institute); Zheng, Huanhuan (Asian Development Bank Institute)
    Abstract: Driven by waves of foreign capital inflows and outflows, Indonesia, the Republic of Korea, and Thailand—among several other emerging markets—have resorted to capital control policy since 2006. Are capital controls effective? Controls on capital inflows have been experiencing a renaissance since 2008, with several prominent Asian and Latin American countries implementing them. This paper focuses on Brazil, which instituted five changes in its capital account regime over 2008–2011. It concludes that the effectiveness of capital controls should be viewed on a case-by-case basis, together with the political economy considerations, and other policy tools, i.e., foreign exchange intervention.
    Keywords: capital control; brazil; global financial crisis; mutual fund flows; exchange rate
    JEL: E60 F32 G23
    Date: 2013–05–28
  49. By: Swamy, Vighneswara; S, Vijayalakshmi
    Abstract: This paper intends to analyse and elucidate the impact of Fair Value Accounting on the banking industry in general and Indian Banking in particular in the light of the move towards convergence to International Financial Reporting Standards across the globe. In the light of criticism against fair value accounting for amplifying the subprime crisis and for causing a financial meltdown, the article has analysed the nature and impact of Fair Value Accounting in view of the recent announcement of the Indian version of IFRS i.e Ind AS by the regulators in India and its impact in relation to the contentious issues like; systemic risk, contagion and its impact on investors. Further, the article highlights the areas in which Indian banking industry is required to focus before and after the implementation of Fair Value Accounting and their consequences on the financial statements of the Bank.
    Keywords: IFRS, Banking, Convergence of IFRS, Financial reporting, Investment, Capital, Banking
    JEL: E22 G24 M41
    Date: 2012
  50. By: Dean Karlan; Jonathan Zinman
    Abstract: The long-run price elasticity of demand for credit is a key parameter for intertemporal modeling, policy levers, and lending practice. We use randomized interest rates, offered across 80 regions by Mexico’s largest microlender, to identify a 29-month dollars-borrowed elasticity of -1.9. This elasticity increases from -1.1 in year one to -2.9 in year three. The number of borrowers is also elastic. Credit bureau data does not show evidence of crowd-out. Competitors do not respond by reducing rates, perhaps because Compartamos’ profits are unchanged. The results are consistent with multiple equilibria in loan pricing.
    JEL: E43 G21 O11 O12
    Date: 2013–06
  51. By: Russell Thomson (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: This paper presents new estimates of the efficacy of R&D tax incentives using cross-countrycross-industry data and a novel measure of tax policy that incorporates differences in the average capital–labour ratio in R&D investment across industries and variation in the tax treatment of different expenditure types across countries and over time. The results suggest that, in the short run, industry increases R&D investment by 0.24 dollars for every dollar of tax revenue forgone. The results appear to be more robust than estimates based on crosscountry or firm-level data.
    Keywords: Innovation policy, R&D tax credits, determinants of R&D investment
    JEL: E22 O31 O57
    Date: 2013–05
  52. By: Elasrag, Hussein
    Abstract: Micro, small and medium sized enterprises (M/SMEs) are a dynamic force for sustained economic growth and job creation. They are a valid, crucial component of a vibrant industrial society.M/SMEs stimulate private ownership and entrepreneurial skills; they are flexible and can adapt quickly to changing market demand and supply conditions; they generate employment, help diversify economic activities and make significant contribution to export and trade.Many small projects stalled, especially in light of a great revolution of January 25, 2011. The role of small and medium-sized enterprises in the industrial development of Egypt.
    Keywords: small and medium-sized enterprises , the industrial development , Egypt
    JEL: E02 L0 L6 M2
    Date: 2013–06–01

This nep-mac issue is ©2013 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.